A Numerical Experiment in Insured Homogeneity

This paper examines whether the underpricing of IPOs exists in a regulated industry such as insurance, which is the largest state-regulated industry in the United States. Our results find significant evidence of a joint effect of price support and information asymmetry on insurance IPOs. This suggests that the regulatory constraints, monitoring, and reporting in the insurance industry do not eliminate the underlying factors of information asymmetry that lead to IPO underpricing. We also find that underpricing is more significant when the issues are underwritten by less prestigious underwriters, a fact that is consistent with existing literature. Finally, we find investor optimism initially overprices the insurance IPOs, which subsequently causes long-term negative abnormal returns as prices return to more normal levels.